Latticework and mental models applied to investing

Investment Learning
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This thread is intended for people who are interested in applying broad-based principles from different disciplines to investing (inspired by Munger’s latticework theory)

I spent a considerable time creating a latticework of around 90 mental models from the major disciplines. After reading multiple books/blogs watching tons of videos on these topic. My 90 or so mental models fall in 14 categories in a discipline agnostic fashion. I want to make this a part of my thinking tool kit and have started using some of these broad concepts to solve problems and figure out patterns.The 14 categories each have around 8 models and are broadly ordered in terms of the scope of applicability that I have observed through usage.

When it comes to investing, I have broadly categorized high quality companies in two broad based mental model categories.

One is that of Creating Value (something related to the 0 to 1 concept). When you see this in terms of Munger’s mental modes, I am talking about businesses that identify their specific ecosystems and exploit the particular Niche that they are creating. As the product gets more accepted and the niche expands, they create network effects and economies of scale . These are companies like Coca Cola and Google.

The other type is the company that Unlocks Value that exists but has yet not been exploited (a phenomenon like Globalization is an example of this, where underdeveloped economies clone processes successfully operated in developed economies). These companies use algebraic equivalence (which can be thought of as an undiscovered arbitrage opportunity) to gain unutilized pricing power or take advantage of value migration . These companies are not inventing anything new, they are just great at observing nuances and cloning .

I am not saying that money can only be made in these companies by any stretch of the imagination, but in order to identify great companies in early stages, we need to identify some qualitative features that help us in uderstanding if a narrative is being developed.

There are other mental models you like Antifragility, these are general characteristics and frameworks that I like seeing in businesses (in addition to Out-cooperation , Adaptability , tailwinds that act like positive feedback loops ). Some of these can be controlled by an effective management that is great at operations and capital allocation. Therefore, I look at these criteria as management ability and keep it separate from the business model evaluation.

Some of this might just sound like theory but I have made great returns by choosing stocks that fell into these categories of companies. And, using some of this like a qualitative checklist.

If you agree/disagree or have a different take on this, I would love to hear it to improve my ability to think from a wider lens.

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Hi Pavandeep,

Good to start this thread. I am also interested in this topic. You can also share some good resources on the same. Farnam Street is a good source to start for anyone interested.

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Farnam street, Chalie’s speeches. There is a new book that I do not know why no one talks about, it is called Super-thinking, written by Gabriel Weinberg who is the founder of DuckGoGo and a great thought leader. I really like Naval Ravikant (investor and founder of angel list), and he has talked about model thinking here and there. There is also a book called latticework- the new investing, I did not like it too much but any information about this topic, good or bad is scarce and useful.

I think it is important to learn all the models which is probably the easiest part and can be done in a week. This is something that a lot of people do, because most of these mental models were taught in school.

I think the next part of creating a latticework or a checklist framework which can be easily recalled, is the step that most people do not get to. However, it is not difficult once you start working on it.

Then the final part is to apply this system in all walks of life (not just investing). Slowly you will start seeing connections. You will be able to look at problems and find out how they are similar to the models and this will help you to understand the nature of the problem better in order to solve it.

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I’ve always been intrigued by the idea of mental models too. Just having a framework in mind often helps in thinking through things.

One such framework, I’d like to highlight is the 7 Powers by Hamilton Helmer. It just breaks down competitive advantage into 7 categories -

  1. Scale
  2. Network Effects
  3. Brand
  4. Counter Positioning
  5. Process Power
  6. Switching Costs
  7. Cornered Resource

So now, whenever someone mentions “Moat” I can’t help but try to better understand which of the powers is the business leveraging. (Can be more than 1)

As mentioned above in the thread, if someone is interested in knowing more about mental models, Munger is the go-to guy. I highly recommend the book “Seeking Wisdom: From Darwin to Munger”. Also stuff by Taleb, Kahneman, Mauboussin is great. (Honestly, the list seems endless here)

Also, I recently wrote about 23 mental models and their investing significance. You can check that out too, on the off chance it interests you.

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